This journal is written by Simon Ward, Henderson's chief economist. Simon comments on economic and market developments from a monetary perspective. We hope you find the content interesting and welcome comments or questions.

The national accounts rental yield – actual plus imputed owner-occupier rents expressed as a percentage of the value of the housing stock – stood at an estimated* 3.94% at the end of the first quarter of 2012, up from a revised 3.89% in the fourth quarter of 2011. This compares with a long-run average of 3.61%, suggesting that house prices are undervalued by about 8% relative to rents – see chart.

The rise in the yield from 3.66% a year earlier (i.e. in the first quarter of 2011) mainly reflects a 7.5% increase in rents in the latest four quarters from the previous year.

The merits of the rental yield as a valuation metric were discussed in a previous post.

*The value of the housing stock is estimated for 2011 and beyond by linking the last published number – for end-2010 – to the ONS (previously DCLG) house price index.

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